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California Electricity Crisis and its Environmental Impacts


In 1994, the South Coast Air Quality Management District (SCAQMD) implemented a cap and trade system| the Regional Clean Air Incentives Market (RECLAIM) | to control emissions of NOX and SOX in California. This program aimed to reduce NOX and SOX emissions by issuing permits to 392 facilities in Southern California. A tradable but non-bankable permit was required to cover each unit of NOX and SOX emitted. The total number of permits issued decreased annually to force firms to either reduce production or increase pollution abatement. The program expected to get to the "crosspoint"(i.e. when the amount of emissions equals the number of permits issued) in 2000. Firms' options to remain in compliance included reducing production, increasing operating eefficiency, installing abatement technology, or purchasing more permits. Failure to comply meant incurring a heavy penalty.


Since the market price for permits was low and the number of available permits exceeded the number of emissions for a long period of time after the implementation of RECLAIM, most firms were not constrained by RECLAIM until 2000. However, in 2000, because of the California Electricity Crisis, demand for permits increased as the gas-fired generators had to increase production in response to a drop in electricity supply. Permit prices increased from $30/ Mwh to $240/ Mwh. This increased the marginal supply costs for a peaking turbine from $100 to $120/ Mwh. To avoid a crisis, SCAQMD negotiated with gas-red generators, suspending their involvement in the permit market and allowing them to emit more in exchange for installing the available abatement facilities.

The California Electricity Crisis therefore unexpectedly forced most of the gas-red power plants to install abatement facilities in a short amount of time, significantly improving the environmental quality of some neighborhoods.  This positive shock to environmental conditions triggered a gentrification process in Los Angeles neighborhoods.


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